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IN THE HIGH COURT OF SOUTH AFRICA

WITWATERSRAND LOCAL DIVISION

Case No. 08/8143

In the ex parte application of:

NEW SEASONS AUTO HOLDINGS (PTY) LTD Applicant

JUDGMENT

Horwitz AJ: The present application is one by a company for its own winding up. The application was launched on the strength of a resolution passed by the company’s board of directors that such an application be made and what falls to be decided is whether it is competent to grant a winding up order on the strength of their resolution alone.

Mr Machaba, who appeared on behalf of the applicant, provided me with very full heads of argument and I am grateful to him for them. It is apparent that there are two diametrically opposed lines of thought. According to the one view, a resolution of the board of directors of a company is insufficient to have the company wound up; only the members in general meeting may resolve to do so. According to the opposing view, the directors are indeed vested with the power to cause the company of which they are directors to be wound up, without a members’ resolution.

Support for the former view is to be found in the respective judgments of Didcott J in Ex Parte Russlyn Construction (Pty) Ltd 1987 (1) SA 33 (D) and Leveson J in Ex Parte Screen Media Ltd 1991 (3) SA 462 (W). The latter view found favour with Schutz J (as he then was) in Ex Parte Tangent Sheeting (Pty) Ltd 1993 (3) SA 488 (W) and Leach J in Ex Parte Graaff-Reinet Rollermeule (Edms) Bpk 2000 (4) SA 670 (E).

The matter has also received comprehensive attention in Henochsberg on the Companies Act Vol 1 pages 717 to 719.

No good purpose will be served in my reviewing the English and Irish authorities and the older South African ones. That was done in the four South African cases which I have just mentioned and none provided the answer in any of those four cases. I intend therefore to limit myself to a review of the motivation in each of the latter, to draw what I can upon the learning in Henochsberg and with the aid of those resources, express an opinion which I will happily be able to say is supported by fifty percent of the case law on the subject, albeit at odds with the other fifty percent.

The Companies Act, No. 61 of 1973 (to which I will henceforth refer simply as “the Act”) does not itself legislate in regard to the powers of directors of a company. This is something dealt with in the Articles of Association of each company. Didcott J did not have before him the articles of the applicant in that case but went on to assume that they were identical to article 60 of Table B in the First Schedule to the Act. Mr Machaba tendered me a copy of the Articles of the applicant in the case before me. The relevant article is also numbered 60 and is identical to article 60 of Table B. I quote the relevant portion thereof:

“The business of the company shall be managed by the directors who... may exercise all such powers of the company as are not by the Act or by these articles required to be exercised by the company in general meeting.”

The same position pertained in the matter before Leveson J, the only difference having been that because the applicant was a public company, the relevant article was number 59 in Table A. The two articles are framed in identical terms.

In Ex Parte Tangent Sheeting (Pty) Ltd, Schutz J did not refer at all to the articles of the applicant. He found the answer solely by reference to section 346(1)(a) of the Act, which provides that a company may apply for its own winding-up. The learned Judge expressed himself as follows:

“To my mind, there is no reason to confine the meaning [of section 346(1)(a)] to the company in general meeting. The expression is not invariably used in that way, not at all, and I do not think that it is used in that way here. There are trenchant reasons why a board of directors should be empowered to apply for a winding-up without having to wait for a decision by the members, which in companies of any size takes a considerable time. Indeed, there are cases in which it is the duty of directors to bring an end to the activities of a company as soon as possible. Also, they may have a proper interest in doing so, in that if they do not, they may be guilty of carrying on the business of an insolvent company.”

The obverse side of the coin, so to speak, is that there are trenchant reasons why a board of directors should not be empowered to apply for a winding-up order: winding-up is very useful tool in the hands of the unscrupulous. Wayward directors who have been guilty of wanton mismanagement may want to cover their tracks and the fact that the Act contains provisions to facilitate investigations in such circumstances is not a panacea for this type of criminality.

Apropos Schutz J’s statement that the directors may have a proper interest in winding up a company because if they do not, they may be guilty of carrying on the business of an insolvent company, Leveson J acknowledged the possibility of directors’ finding themselves in this very situation. He said:

“It is well recognised that a company in insolvent circumstances should not continue to trade, especially where it may incur credit and be unable to pay a consequent indebtedness. Thus it may be argued that it is an aspect of good management for the Board to resolve on liquidation where a meeting of the general body of members cannot be assembled easily or speedily to pass the appropriate resolution.

I think that in that argument the scope of the word 'manage' is unduly widened. Didcott J took the same view at 37A. This feature, in my opinion, does not give the directors a power which they do not otherwise enjoy. The simple answer is that, if they find the company in such circumstances, they must cease trading forthwith.”

The learned Judge stopped short of holding that the power to wind up was an indispensible one in circumstances in which a cessation of trading activities is indicated. This was in line with what Didcott J had stated at p 37A – B:

“As for the power to stop the company's trading activities or other operations, I shall suppose that the directors have it. They probably do. It seems to be inherent in the power to manage the business. In dire circumstances it may even amount to a duty. To call a halt to the company's operations is, however, one thing. It is a far cry from that to the fundamentally different and much more drastic course of putting an end to the company itself.”

In Ex Parte Graaff-Reinet Rollermeule (Edms) Bpk, Leach J aligned himself with the view of Schutz J. He, too, did not refer to the articles of the applicant so I must assume that the reasoning of Schutz J, resting solely on a construction of section 346(1)(a), sufficed.

One aspect of the judgment of Leach J calls for comment. At 671E-F, the learned Judge said:

“The learned author of Henochsberg on the Companies Act at vol 1 at 716 - 18 expresses the opinion that a company cannot apply for its own winding-up upon a resolution of its directors without also a resolution of its members. This view is founded on art 60 of Table B to the First Schedule of the Companies Act which provides:

……….”

He then proceeded to quote the provisions of article 60.

I unfortunately do not have at my disposal the commentary in Henochsberg as it was at the time that that judgment was delivered. There have been a number of updates since then and my reading of the entire passage in its present form indicates to me, with respect, that the authors state precisely the opposite. The commentary at 718 commences with the following:

“It is respectfully submitted that there is no principle in company law that a company can apply for its own winding up upon a resolution of the directors without also a resolution of members. The question in each case is whether under the particular company’s articles the directors are empowered to cause the company to apply for its own winding up without a resolution of members. The answer to this question depends on an interpretation of such articles.”

The discussion then continues with, inter alia, an analysis of the view of Didcott J and apropos that, the authors express themselves thus:

“Be this as it may, the statements of Didcott J, with respect, are correct. However one may be influenced to a contrary conclusion by considerations of commercial expediency, it is submitted that it would be doing violence to language to hold that a power to manage its business includes a power to liquidate the company. But this is not the end of the matter. Article 59 reads “…and may exercise all such powers of the company as are not by the Act, or by these articles, required to be exercised by the company in general meeting”.”¹

The authors then conclude that the words in quotation marks (i.e., the quotation marks within the quotation) indeed vest the directors with the power to launch an application for the winding up of the company and the discussion ends thus:

“It is accordingly respectfully submitted that under art 59 (or one having the same effect) the company’s power under s 346(1)(a), which the Act nowhere states is to be exercised in general meeting, may be exercised by the directors without a members’ resolution (unless another article requires such power to be exercised in general meeting).”

I find myself in respectful agreement with the view of Didcott J which he expressed thus (at p 34C):

“One does not manage the business of a company, in my opinion, by deciding to terminate the company's very existence. That strikes me as the antithesis of management.”

Similarly, I respectfully agree with the view of Leveson J which is to the same effect. It follows that I agree with Henochsberg’s commentary on the learned Judge’s judgment insofar as it relates to the passage which I have just quoted. I disagree, however, with Henochsberg’s view on the meaning and import of article 59 of Table A (article 60 of Table B). Henochsberg seeks to divide this single sentence into two distinct parts: the first part dealing with the management of the business of the company and the second part dealing with

“all such powers of the company as are not by the Act or by these articles required to be exercised by the company in general meeting.”

I do not believe that that is an accurate reading of the relevant article. The article does not purport to create two repositories of power, one dealing with the management of the company and one with all other powers, of any nature whatsoever, excluding those which the Act or the Articles require to be dealt with by the company in general meeting, that is, by the members of the company. The article commences with a reference to the business of the company and everything that then follows, in my view, must hark back to that concept. On my reading of that article, therefore, the business of the company is to be managed by its directors, who are then vested with all powers which relate to the business of the company, other than those specifically provide for. As Didcott J pointed out (at pp 36J – 37A) the article refers to the “business” of the company, not the “affairs” thereof. My understanding of the judgment of Didcott J is that he understood the article as I do.

Before concluding, I should make mention of the critique by Prof JS McLennan in Vol 104 (1987) SALJ 232 under the title Powers of Directors to Wind Up Insolvent Companies, upon which Schutz J placed some store. The thrust of the author’s commentary is that there is some modern trend to consider directors as being vested with plenary powers and a virtually unfettered discretion in regard to the handling of the affairs of companies. He states (at p 233) that

“our courts, as well as the courts of England, have not seen fit to put a restrictive interpretation on articles similar to arts 59 and 60.”

I am unaware of cases in which it has been held that those articles should be interpreted in a particular way. In any event, I do not believe that I have, in my construction of articles 59 and 60, opted for a construction which can be characterised as either restrictive or liberal. I think that the syntax thereof does not allow for another construction. One would have to render the sentence grammatically clumsy to reach another conclusion. If my view is redolent – in the words of the author – of “an old-fashioned idea”, not in conformity with what he refers to as a “division of powers”, so be it. I cannot subscribe to a view which I believe does violence to the true meaning of the articles.

In my view, therefore, the board of directors of the applicant did not have the power to launch the present application without a resolution approved by a general meeting of the company. I have considered whether I should postpone the application for the company to remedy the deficiency. I do not believe that I should do so. Bearing in mind the provisions of section 348 of the Act, the matter is left in a state of uncertainty, depending on whether the members of the company do or do not pass the necessary resolution. There may be others who want to bring an application for the winding up of the applicant and the fact that the applicant has taken out a security bond may preclude others from doing so. On the other hand, if the applicant wants to bring an application afresh, it can do so with little effort.

The application is therefore refused.

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A.J. Horwitz

Acting Judge of the High Court

Date of judgment : 31 March 2008

Applicant’s counsel : T Machaba

Applicant’s attorneys : Mkhabela Huntley Adekeye Inc

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